STAATSKOERANT, 31 MAART 2011

GENERAL NOTICES

NOTICE 186 OF 2011

DEPARTMENT OF TRADE AND INDUSTRY

No. 34173 3

CONSUMER AFFAIRS (UNFAIR BUSINESS PRACTICES} ACT, No 71 of

1988

I, Dr Rob Davies, MP, Minister of Trade and Industry, do hereby, in terms of

section 10(3) of the Consumer Affairs (Unfair Business Practices) Act, 1988

(Act No. 71 of 1988), publish the report of the Consumer Affairs Committee on

the investigation conducted by the Committee pursuant to Notice 291 of 2010

as published in Government Gazette No. 33073, Vofume 537, dated 31 March

2010, as set out in the Schedule.

Dr ROB DAVIES, MP

MINISTER OF TRADE AND INDUSTRY

4 No.34173 GOVERNMENT GAZETTE, 31 MARCH 2011

thedti ~~ CONSUMER AND CORPORATE -~

REGULATIONS DIVI SION ~~ SOUTH A FRICA -

REPORT IN TERMS OF SECTION 10(1) OF THE

CONSUMER AFFAIRS (UNFAIR BUSINESS PRACTICES) ACT, 1988(ACT 71 OF 1988)

REPORT No. 127

Investigation in terms of section 8(1)(a) of the Consur;ner Affairs (Unfair business Practices) Act, 1988, in to the business practice of A1 Chic & Veg Franchise cc.

STAATSKOERANT, 31 MAART 2011 No.34173 s

1. INTRODUCTION

The Consumer Affairs Committee ("Committee") resolved on 14 November

2008, to authorize a section 4(1) (c) (preliminary) investigation in terms of the

Consumer Affairs (Unfair Business Practices) Act, No. 71 of 1988, (the Act),

into the business practice of A1 Chic & Veg Franchise (Chic & Veg). This

authorization was informed by a number of complaints received against the

respondent by the Office of Consumer Protection (OCP). The purpose of the

investigation was to gather more information on the business practice.

On 26 November 2009 the Committee further resolved to undertake a section

8(1) (a) investigation into the business practices of Chic & Veg. The

Investigation Notice was published in Government Gazette No 33073 on 31

March 2010 under Notice No. 291 of 2010. Upon publication one comment

was received. This was from a firm of attorneys representing a consumer

who had not lodged a complaint with the Committee. The comment

highlighted a pending case against Chic & Veg in the High Court of South

Africa for a claim of one hundred and thirty five thousand rand (R135 000.00).

2. THE CONSUMER AFFAIRS COMMITTEE

The Committee was established in terms of section 2 of the Act. The purpose

of the Act is to provide for the prohibition or control of unfair business

practices and related matters. An "unfair business practice" is any business

practice which directly or indirectly, has or is likely to have the effect of

harming the relations between businesses and consumers, unreasonably

prejudicing any consumer, deceiving any consumer or unfairly affecting any

consumer or natural person.

The Act confers wide investigative powers on the Committee. In terms of the

Act the Committee may conduct two types of formal investigations. First, in

terms of section 8 of the Act, the Committee may on its own initiative, and

shall on the directions of the Minister of Trade and Industry (the Minister),

undertake such investigation as it may consider necessary into any unfair

6 No. 34173 GOVERNMENT GAZETTE, 31 MARCH 2011

business practice of particular individuals or persons that the Committee

believes exists or may come into existence. Secondly, the Committee may

investigate any business practice being applied by persons in general for the

purposes of creating or maintaining an unfair business practice.

The first type of investigation is a section 8(1) (a) investigation in terms of the

Act and the second a section 8(1) (b) investigation. These types of

investigations are known as formal investigations.

The Committee can also undertake preliminary investigations in terms of

section 4(1) (c) of the Act into the business practice of an entity. A section

4(1) (c) investigation enables the Committee to undertake such preliminary

investigation as it may consider necessary into, or confer with any party in

connection with, any unfair business practice which allegedly exists or may

come into existence. Notice regarding a section 4(1) (c) investigation is not

published in the Government Gazette as opposed to the notices in terms

section 8 (1) investigations. The purpose of a section 4(1) (c) investigation is

to enable the Committee to make a more informed decision as to whether a

section 8(1) (a) investigation should be undertaken.

The Committee reports to the Minister on the result of any investigation

undertaken by it in terms of section 8(1 ). If the Committee, after an

investigation, believes that an unfair business practice exists, or may come

into existence and is not satisfied that the business practice is justified in the

public interest, the Committee in its report recommends to the Minister the

action that should be taken to ensure the discontinuance of the unfair

business practice. The orders of the Minister are published in the Government

Gazette and a contravention of the Minister's order constitutes a criminal

offence.

3. THE BUSINESS PRACTICES OF A1 CHIC & VEG FRANCHISE

A 1 Chic & Veg Franchise (Chic & Veg) is a Close Corporation registered in

terms of South African law with registration No.2001/022423/23. It is involved

STAATSKOERANT, 31 MAART 2011 No.34173 7

in the business of selling franchises to consumers through advertisements in

print media, including "SA Guide to Business Opportunity".

When consumers enquired about, and applied for, the advertised business

opportunity, they were required to pay a non-refundable amount of five

thousand rands (R5000.00) to Mr Sarel Grobler, the owner of the franchise

business. This amount was said to be an administration fee relating to the

approval of the consumer's application. Consumers were also required to pay

the balance of the purchase price as stipulated on the franchise agreement

upon signature of the agreement.

Chic & Veg, operated by Mr Grobler, who purported to be a franchisor,

advertised that it was selling franchise business to potential franchisees. It is

therefore important to understand the nature of a franchise agreement. A

franchise agreement is essentially an agreement or a license between two

parties which gives a person (franchisee} the right to market a product or

service using the trademark of another person (franchisor). Franchisors are

successful entrepreneurs (or are formed by successful entrepreneurs) who

have developed particular business models. They allow franchisees to have

access to their business know how by providing them with licenses to use

their trademarks, intellectual property, operating and business plans and other

proprietary information necessary for the operation of a franchised outlet.

Franchisors also provide franchisees with the necessary training, support,

advertising and marketing assistance that is necessary to promote their

particular franchised brand. This enables the brands to penetrate the market

and achieve greater brand recognition amongst consumers. In successful

franchise relationships, franchisees have the right to operate carefully tested

and proven systems and in return they will make regular royalty payments to

their franchisors.

The interdependence between the parties is what makes franchising such an

attractive proposition because each party wants the other to succeed. A pre­

requisite for successful franchising is that the franchisor must have in place

the following: An existing good name, goodwill, a successful product or

8 No.34173 GOVERNMENT GAZETTE, 31 MARCH 2011

service, marketing procedures, expertise, systems and support facilities. If a

so·called franchise does not offer all of these pre·requisites, it is not a true

franchise and consumers may be misled into paying for something which

either does not exist or which does not have the means to support them as

franchisees or meet their expectations.

4. THE INVESTIGATION

The purpose of the specific formal investigation undertaken by the Committee

in terms of section 8(1) (a) of the Act was to obtain information regarding the

business practices of Chic & Veg and/or Mr. Sarel Grobler and further to

determine whether or not such practices are unfair to consumers. Where the

practices are found to be unfair, the Committee has the power to make

recommendations to the Minister regarding the control or prohibition of the

business practices through the publication of a relevant notice in the

Government Gazette.

The Committee received four complaints from consumers who allegedly

responded to advertisements for a franchise business opportunity listed on

"S.A Guide to Business Opportunity". These consumers applied for and paid

substantial sums of money towards the franchise businesses. All in all, the

four complainants paid R860 000 to Mr Grobler. Mr Grobler, allegedly failed to

discharge his obligations in terms of the agreements or to remedy the breach

and/or refund the complainants. In terms of complaints received by the

Committee, the following issues were raised:

One complainant was requested to sign a lease agreement with the

landlord before the respondent could install shop fittings. This

requirement was met by the complainant, who paid a deposit to the

lessor.

Another complainant was requested to apply for ADSL lines with

Telkom for the operation of the franchise system. The lines were

applied for and installed as requested.

STAATSKOERANT, 31 MAART 2011 No.34173 9

The other allegations were that Mr Grobler:-

- Requested sizes of the corporate uniforms for members of staff. The

sizes were provided but the uniforms were never delivered.

- Confirmed his awareness of his obligations in terms of the franchise

agreement but advised the complainants that he had a family crisis.

- Verbally accepted that he had failed to perform in terms of the

agreements and undertook to refund monies paid. He, however, failed

to honour his undertakings.

Proposed settlements agreed to make partial refunds, without admitting

liability but failed to honour the settlement arrangement.

In one case Mr Grobler requested a letter of termination of the agreement

from the complainant and, promised to revert to him, which he failed to

honour. He was thereafter not contactable.

Another complainant secured a loan to finance the franchise business, and

she remains indebted to the financial institution.

Complainants were at some point also advised to cancel the agreements but

were informed that they would forfeit everything they had paid towards the

establishment of the franchise business. Mr Grobler's undertaking to refund

some of the money as goodwill failed to materialise.

For the purposes of this investigation, the following are some of the relevant

obligations of the parties as set out in the franchise agreement:

FRANCHISOR'S OBLIGATIONS IN TERMS OF THE FRANCHISE

AGREEMENT

In terms of clause 4 of the franchise agreement, the Franchisor shall,

provided that all payments referred to in clause 10 and 11 thereof have been

made:

• Disclose the business system to the franchisee and make available the

10 No. 34173 GOVERNMENT GAZETTE, 31 MARCH 2011

intellectual property rights licensed to the Franchisee in terms of this

agreement,

• Arrange and facilitate, as agent, delivery to and purchase by the

Franchisee of the items listed in annex "C" to the franchise agreement.

Annex C refers to furniture, fittings, equipment and supplies to be

installed at the premises.

• The Franchisor will advise and counsel the Franchisee in respect of the

following matters relating to the establishment of the franchised

business on the premises:

A floor plan of the proposed premises

"Suitable premises to be approved by the franchisee"

"Trade [ad} dress of the premises"

FRANCHISEE'S OBLIGATIONS IN TERMS OF THE FRANCHISE

AGREEMENT

• Upon approval of the application, a non refundable deposit of R5

000.00 (excluding VAT) will be payable by the prospective franchisee.

This deposit will be applied by the franchisor as an administration fee

and will be in consideration for the grant to the franchisee of the non­

exclusive right to use the franchisor's trade names, logo, products and

service in terms of the agreement. The amount forms part of the

purchase price.

• In consideration of the franchise rights granted, the franchisee shall

pay a franchise fee in the amount of R45 000.00 (excluding VAT) on

signature of the agreement, of which R40 000.00 is refundable subject

to certain terms and conditions.

STAATSKOERANT, 31 MAART 201 I No.34173 11

• The franchisee shall purchase and install the equipment, furnishings,

signage and fittings listed In annexure "C" of the agreement The

franchisor shall act as the franchisees' agent in this regard and shall

communicate with the relevant supplier and/or service [provider] on

behalf of the franchisee in all respects relevant to such supply and

installation.

(A copy of the Franchise agreement is attached herewith marked "A").

BREACH

The franchise agreement consists of certain breach clauses. The following

clauses were relevant to the investigation:-

• In the event of the franchisee failing to pay the franchisor, by the due

date, any sum due and owing to the franchisor hereunder or in any

other way breaching the terms and conditions of this agreement, all of

which are declared .to be material, and failing so to pay or to remedy

the breach within 7 {seven) days of written notice by or on behalf of the

franchisor, calling upon the franchisee to make payment or remedy the

breach complained of, or if the franchisee commits an act of insolvency

or is sequestrated or placed under a provisional or final winding-up or

judicial management order, or fails to satisfy or take steps to have set

aside any judgment taken against the franchisee, within 7 ( seven

days after such judgment has come to the notice of the franchisee.

• The franchisor shall have all rights without prejudice to any other rights

afforded to the franchisor in terms of this agreement or in law, to

forthwith cancel this agreement by written notice to the franchisee and

retain as a genuine pre-estimate of its liquidated damages all and any

monies that it may have earned or received or have been paid as a

deposit in terms of this agreement or as a result of any negotiations

leading to this agreement.

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On 26 November 2009 the Committee resolved to summons Mr Grobler to

attend its next meeting. The summons was duly served on Mr Grobler's

attorneys on 9 December 2009 as it was established that he was no longer

operating at the physical address provided. Further, the landlord of the

premises advised that he had terminated the lease agreement with Mr

Grobler. Mr Grobler's attorneys undertook to inform their client of the

summons issued by the Committee.

representative attended the meeting.

Neither Mr Grobler nor his

On 11 February 2010, the Committee resolved to proceed with the publication

of a section 8(1) (a) investigation notice in the Government Gazette in view of

the respondent's failure to co-operate with the Committee~ A copy of the

notice of investigation is attached hereto marked "B". A further complaint was

received in March 2010.

On 30 July 2010, Mr. Grobler advised as follows:

the business has been closed and is under liquidation;

the complainants who have complaints against the Chic & Veg and or

Mr Grobler should institute civil claims in order to recover their monies

The Master of the High Court- Western Cape was unable to confirm that he

had received an application for liquidation by or against Chic & Veg and/or Mr

Grobler.

5. COMMITTEE'S FINDINGS IN THE BUSINESS PRACTICE OF A1 CHIC &

VEG

Chic & Veg and/ or Mr Grobler have continuously failed to fulfill its contractual

obligations. More particularly Mr Grobler failed to provide any support for the

establishment of the franchise business and instead failed to come to the

assistance of any of the complainants. It appears to the Committee that Chic

& Veg does not appear to be a properly established franchisor.

When consumers requested termination of their agreements due to non

STAATSKOERANT, 31 MAART 2011 No.34173 13

performance, Mr. Grobler advised them that the payments which they had

made would be forfeited to him. This, notwithstanding the fact that consumers

were terminating the agreements because Mr. Grobler and/or Chic & Veg had

failed to perform according to the standards required of a properly established

franchisor. In the circumstances, Mr. Grobler was obtaining payments from

consumers without carrying out any of the obligations of a franchisor.

The Committee has established that Chic & Veg is not a member of FASA

(Franchise Association of Southern Africa); as such, complaints against the

respondent could not be referred to and/or disposed of, in terms of the F ASA

code.

FASA is a self- regulatory institution which has, over time, developed a code

of conduct which the Committee has acknowledged and refers to from time to

time as a yardstick when considering business practices in the franchise

industry.

In terms of the FASA Code:

• Every Franchisor member shall ensure that all moneys which such

Franchisor Member may receive from any other person ("the

prospective Franchisee") in contemplation of the conclusion of a

franchisee agreement are deposited in an attorney's trust account or a

separate bank account maintained for that purpose.

• Where a Franchisor Member receives any moneys from any

prospective Franchisee in contemplation of the conclusion of a

franchise ,as referred to above, and, whether at the instance of the

Franchisor Member or the prospective Franchisee, negotiations in

connection with such contemplated agreement are terminated without

an agreement being concluded:

• The Francl?isor Member shafl refund the amount it has received

14 No. 34173 GOVERNMENT GAZETTE, 31 MARCH 2011

forthwith, and not later than 30 (thirty) days after having received a

written request form the prospective Franchisee,

• The Franchisor may not retain any part of the amount it has received,

save to cover reasonable out of pocket expenses that it has incurred in

contemplation of the conclusion of a franchise agreement.

The Franchisor member shall provide the prospective Franchisee with

documentary proof of all such expenses. (Copy of FASA Code is attached

marked "C")

The Committee has established that despite Mr Grobler having previously

made offers to some complainants to make either full or partial refunds, he

has failed to honour these settlement arrangements. The Committee has

further established through media reports that there are other consumers who

have entered into agreements with Mr Grobler. It has been reported that

these consumers have also lost substantial sums of money.

None of the concluded franchise agreements dealt with by the Committee was

fulfilled by Mr. Grobler and/or Chic & Veg and no refunds were made to

consumers. Mr. Grobler has shown no willingness to co-operate with the

Committee and its inspectors.

The Committee considered the following:

The forfeiture clause in the franchise agreement, in terms of which

consumers stand to forfeit all payments made should they cancel the

agreement.

Mr Grobler's failure to discharge his contractual obligations as a

franchisor.

Mr Grobler's refusal to refund complainants on cancellation of the

agreement.

Mr Grobler's failure and/or refusal to communicate with affected

consumers.

STAATSKOERANT, 31 MAART 2011 N.o . 34173 15

The Committee is of the view that the business practice of Chic & Veg and or

Mr Grobler, which business practice involves the sale of franchise businesses

is prejudicial, deceptive, and unfairly affects consumers. It is further evident

to the Committee that Mr Grobler and/or Chic & Veg is not an established

franchisor, as this "franchisor" is receiving funds from consumers despite the

fact that they do not appear to be in a position to fulfill their obligations as a

franchisor and because consumers stand to forfeit the full franchise price paid

even though it is Mr. Grobler who has failed to perform in terms of the

agreement.

6. CONCLUSION /RECOMMENDATIONS

The Committee has concluded that the sale of franchises by Mr. Sarel Grobler

and/or Chic & Veg constitutes an unfair business. practice in terms of section 1

of the Act. The Committee is not satisfied that the unfair business practice is

justified in the public interest.

The Committee is further of the view that it is not in the public interest to allow

Mr. Sarel Grobler and/or Chic & Veg to continue disposing of any franchise

business and or being entrusted with funds from consumers.

In order to prohibit the business practice, the Committee recommends that in

terms of section 12 of the Act:

The Minister declares unfair and unlawful the business practices of Chic &

Veg, and/or Mr. Sarel Grobler, and orders that both of the said parties refrain

from the advertisement and or sale of any franchise business or any part

thereof. Further that Mr. Sarel Grobler be prohibited from being entrusted

with or from re · · unds from consumers.

dhJ-::k~ PR ESSOR TANYA WOKER

CHAIRPERSON: CONSUMER AFFAIRS COMMITTEE